Which Is Best for Marketing Budgets… Advertising-to-Sales Ratio or Zero-Based Budgeting?
What is your goal as leader of your organization? It’s to grow beyond where you currently are, right? You want to know what lies ahead and how to plan for an ever-changing market. At some point, you’ll need to take a serious look at your marketing budget.
And by serious, I mean not just arbitrarily looking in the rearview mirror to determine what lies on the road ahead, but instead having a vision as to where you want to go and developing a sound marketing strategy that will get you there.
Of course, to develop a marketing strategy, you’ll need a marketing budget.
There are 2 types of budgeting that directly conflict with one another: zero-based budgeting and advertising-to-sales-ratio budgeting.
Which is best?
This conundrum leaves you feeling stuck—like you’ve been placed between a rock and a hard place.
The left hand is attracted to the focus that zero-based budgeting provides. You feel in control of what is going where.
On the other hand—you know, the right one—you understand that there needs to be a long-term, incremental approach to brand building in order to create an organization that outlasts market shifts. Is that advertising-to-sales-ratio budgeting? Ehhh, not really.
In this article, we will unpack the following approaches to budgeting for your marketing efforts…
- Zero-Based Budgeting Approach
- Advertising-to-Sales-Ratio Budgeting Approach
- The “Third Way” Approach
The Focused Approach | Zero-Based Budgeting for Marketing Budgets
Zero-based budgeting (ZBB) is a method of budgeting that essentially prepares a budget from scratch each period. It’s a way of budgeting that provides a detailed look at every penny spent.
If you’ve ever tried to do this for your organization or household, you likely noticed a few things it does…
- It accounts for every dollar and ensures that money serves a purpose. You allocate your money to either expenses or savings. The goal is that your income minus your expenses equals zero by the month’s end.
- It helps identify where there is unnecessary spending. For example, do you stick to the list when you make those little trips to the grocery store after work? If not, ZBB will identify the spending behavior—where those extra expenditures, which could be putting a strain on your finances, are being made.
- It keeps you focused. As you track your money flow, it brings your spending to the forefront of your mind, keeping you aware of what you have and don’t have.
- It takes a lot of time. Holding yourself accountable takes work and time. Monitoring every dollar can cause chaos when it comes to variable expenses.
- It’s difficult to use when accounting for unpredictable and irregular shifts in income and expenditures. Life can’t be predicted. It can be planned for, yes, but there will always be fluctuations in your organization, your home, and the market.
Anyone can take this short list and expound on it. But we’re going to look at it from an organization’s perspective.
In theory, ZBB seems logical and absolute. But is there a gray area in there somewhere that would provide a better way to set marketing budgets without a radical rethink of corporate expenditure?
What’s the Alternative to ZBB (at Least Historically)?
There is another approach—the advertising-to-sales ratio that the majority of organizations and businesses set their marketing budgets to.
Does that work?
The Arbitrary Approach | Advertising-to-Sales-Ratio Budgeting for Marketing Budgets
Those opposed to the budgeting approach discussed above might pause for a moment before picking up their ax to chop up the spreadsheets of the detailed expenditures from ZBB.
Here’s the typical process of advertising-to-sales-ratio budgeting…
- The finance executive analyzes the past few years’ revenue and calculates an annual growth rate.
- The growth rate is then used to figure out the expected sales for the upcoming year.
- A percentage of the expected revenue is allocated to marketing.
Now, let me ask you this: If you were sick, would you go to a mechanic to find out what you need to do to get healthy?
After all, he knows how to get a car running smoothly again—why not your body?
Of course not! That makes no sense. So then, should we expect a finance executive—who probably knows as much about marketing and brand building as a mechanic knows about the human body—to be placed in charge of developing a marketing budget that will help the organization grow based on the team’s vision?
Unfortunately, finance executives have a limited viewpoint—just as we all do with what lies outside of our expertise.
There is a lethal problem to the advertising-to-sales-ratio approach to budgeting.
The strategy dies before it begins.
It’s an approach that sets up marketing budgets as a cost without an adequate expectation of impact. It works backward from the assumed.
Getting Unstuck | Going Back to the Rock and the Hard Place and Finding the Third Way Out
Instead of being stuck between the rock of the aggressive, short-term approach of ZBB and the hard place of an abstract, assumed forecast of advertising-to-sales-ratio budgeting, let’s find a way out.
A third way to develop marketing budgets.
Ultimately, you want to grow at a sustainable rate. To do that, there must be a plan that takes into consideration the 2 approaches to budgeting—strategically.
Step 1. Review past performance, market research, and segmentation.
Step 2. Break targeting up into 2 sections:
- Section 1—Brand building for the long haul. Focus on positioning and brand-building objectives. This section will be about relating the objectives back to the donor funnel stages. The annual objectives will be developed over a period of several years in order to reach the ultimate vision of your organization. Expect some return, but know that typically there is very little in the first year of execution.
- Section 2—Traditional segmentation, targeting, and positioning for the short term. Each segment needs distinction with product or mission-based positioning and SMART goals for the upcoming year.
Step 3. Bring it all together. Estimate the financial performance of your organization without any marketing efforts for the upcoming year. Then add all the financial estimates from each of the target segments (section 2) in incremental stages.
As you start to think this way, you’ll notice 2 things: It’s absolutely crucial to begin thinking this way regarding marketing budgets, and it’s not easy to pull off.
You’ll need to commit around 60% of your budget to brand building—those longer-term strategies and tactics—to build longevity and sustainability. But to feed that 60%, you’ll need to make certain that the short-term part of your plan delivers in the upcoming year.
To get out from the rock and the hard place, your thinking has to shift from “this way” or “that way” to the “third way,” which truly embraces the “and.” You can have the best of both worlds.
Want to talk more about marketing budgets and planning? Set up a call with Viral Solutions. The team would love to talk and help you discover how to get unstuck so your organization can move to that next level.
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